THE SEARCH for the BEST CUSTOMERS

WINTER 2020

Get On Board with Onboarding

Commercial Primacy

Banks Respond to Pandemic Cover Story 4 RACE TO QUALITY: RETHINKING DIGITAL ONBOARDING 8 | SITTING DOWN WITH KEN LAROE 12 | THE ART OF SAYING "NO" IN RETAIL DEPOSIT NEGOTIATIONS 16 | A NEW FOCUS ON PRIMACY IN COMMERCIAL BANKING 20 | OLDER AMERICANS WARM UP TO BRANCHLESS BANKING 22 | THE NEW MATH OF DISTRIBUTION PLANNING 26 | PANDEMIC PUSHES BANKS TO IMPROVE OPERATIONS 28 | TAKING TIME TO FOCUS ON THE RELATIONSHIPS YOU CARE ABOUT 32 | NEWS YOU MAY HAVE MISSED 33 | AT THE PODIUM WITH NOVANTAS

2 | A Note from the

EDITORIAL CEOs Director, Novantas Center for the Future of Banking Robin Sidel +1 212.901.2742 [email protected] elcome to the Winter 2020 issue of the Novantas Review. CONTRIBUTORS There are good reasons why this edition focuses on how banks can target, acquire Andrew Hovet and retain the best customers. With interest rates staying low for the foreseeable Hank Israel future and banks wrestling with the impact of COVID-19, these customers are more Brandon Larson important than ever. Mike Rice Peter Serene Luckily, technology can help in more ways than ever before. But these tools aren’t Robin Sidel valuable unless banks put the right programs and processes in place. That is a tall Adam Stockton order for many banks. For example, a growing number of retail customers want and Ethan Teas need to open accounts online, but the process is often still cumbersome and ineffi- Sarah Welch cient. Even when customers succeed in opening the account online, too many banks DESIGN don’t engage with them or take advantage of cross-sell opportunities. Art Direction and Production Adrienne R. Cohen This issue of the Novantas Review explores ways that banks can use primacy, personalization and scoring to deepen existing customer relationships and form new ones. NOVANTAS, INC. The issue also tackles how banks can build awareness and visibility even as they Novantas is a leading provider of shutter branches. We also provide proprietary research that reveals how banks are data, technology and advice to trying to improve their interactions with customers during the pandemic. financial institutions globally.

We wish you good health and a safe holiday season. Co-CEOs and Managing Directors Dave Kaytes Sincerely, Rick Spitler

Corporate Headquarters 485 Lexington Avenue New York, NY 10017 Phone: +1 212.953.4444 Dave Kaytes Rick Spitler [email protected] Co-CEO Co-CEO www.novantas.com

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3 | WINTER 2020 RACE TO

QUALITY:RETHINKING DIGITAL ONBOARDING BY ETHAN TEAS, SARAH WELCH AND BRANDON LARSON

he quality of customers originated through digital channels is of growing concern to traditional banks, par- ticularly as the COVID-19 pandemic has accelerated the shift to digital by three to five years in just a few months. Although many banks have found success driving more customerT acquisition to digital channels, the quality of these new customers is typically poor — from the time of funding through to retention. New Novantas research shows that these problems may be even worse than believed, especially when it comes to balance size and retention. To meet these challenges, Novantas believes banks must take a programmatic approach to improving onboarding: identify focus areas and set target performance for each, prioritize and triage opportunities for rapid execution and measure progress relative to peers. RACE TO QUALITY: RETHINKING DIGITAL ONBOARDING

FROM BAD TO WORSE FIGURE 1: INCREASE IN DIGITAL SALES DURING THE PANDEMIC While some bankers have seen digital account opening growth help offset lost 40 new-to-bank origination from closed 37% branches, results from Novantas’ Orig- ination Quality Benchmarking have 35 found there are common failures among banks and large gaps in balance size and quality. (See Figure 1.) 30 The most alarming revelation: 26% after four months, new-to-bank balances originated in branches can be more than 25 10 times higher than those originated in digital channels. (See Figure 2.) Although some banks in the research showed far 20 19% larger gaps, none exhibited branch orig-

inations that were less than two times % of Responses 15 higher than those of digital. This isn’t simply a theoretical mea- 11% surement or an apples-to-oranges prob- 10 lem. One big issue is that these new dig- 7% ital accounts just never really get going. Digitally-originated relationships are less 5 than half as likely as branch originations to achieve “base quality” by reaching $100 0% or more in balances at the end of month 0 one, according to the Novantas research. 1-20% 21-40% 41-60% 61-90% 91-120% +120% Even considering only the accounts that do achieve base quality, there is still Sales Increase a large gap in balances. In the first month, Source: Novantas SalesScape Comparative Analytics (June 2020)

FIGURE 2: DIGITAL BENCHMARK VS BRANCH BENCHMARK

% of New Accounts that Fund with >$100 at Month One Month Four Balances of Quality Funded Accounts (Segment Represents Number of Accounts in Each Balance Segment)

~2x <$100 $100-10k $10k+ ~4x

16% 16%

70% 70% 61% 61%

29% 29% 7% 7% 67% 67% 23% 23% 26% 26% Digital BenchmarkDigital BenchmarkBranch BenchmarkBranch Benchmark Digital BenchmarkDigital BenchmarkBranch BenchmarkBranch Benchmark

Source: Novantas SalesScape Comparative Analytics (June 2020)

5 | WINTER 2020 COVER STORY branch-originated balances are more A key question, of course, is wheth- than four times larger than those from er these investments help create an the digital cohort. The gap also widens experience that target a more emotional by the fourth month as digital cohorts, on Too many response and boosts trust or confidence in average, underperform on retention and the relationship. The answer will depend balance growth. organizations on the bank’s starting point, objectives Novantas research shows marked are using and particulars of the customers. A par- differences in what is driving gaps allel and equally important question to between branch and digital. For some, consider is if funding is the right place to retention is the key driver. For others, one-size-fits-all focus investment or if digital engagement initial funding or balance growth are and downstream deepening will generate more important factors. approaches. a higher return. Novantas has identified customer To identify focus areas, Novantas experience as the primary driver of suggests that banks must first diagnose the difference, not demographics. One the current experience and performance. doesn’t need to look too closely to find rates and first-month balances, banks This needn’t be a protracted process that that banks don’t make it easy to form rela- could invest in a suite of functional requires detailed journey mapping and tionships online. The emotional attach- changes that might appeal to the rational deep analytics. With clear objectives, the ment and information exchange that is consumer: technology that enables and prioritization of opportunities will be eas- driven by a personal account-opening encourages more funding options, poli- ier. They can then be triaged into those experience just hasn’t been replicated in cies that permit larger initial deposits and that can be deployed immediately, those the digitally-led environment. incentives like a bonus rate tied to the that require test and learn and those that Digital experiences are typically size of a funding deposit. are unlikely to provide a sufficient return. engineered for convenience and speed and are highly standardized. This ignores the many opportunities to create FIGURE 3: QUALITY IMPROVEMENT LEVERS engagement. Among myriad issues, key areas stand out: initial funding, ability to complete the process of setting up the account, a lack of sufficient explanation about products and a lack of opportunities to sign up for additional products. In contrast, the branch experience, even DIGITAL TARGETING INITIAL RELATIONSHIP if clunky, is highly effective. AND OPENING ACTIVATION DEEPENING Things don’t get any better after the point of sale. Again, there are common Shift targeting from Reconsider funding Leverage excess drivers: one-size-fits-all digital communi- “propensity to buy” to options, limits and branch capacity to cation approaches, premature handoff to “expected value” customer experience engage with digital in-life management and underleveraging new-to-bank customers of surplus branch resources. In fact, it Restructure offers to Increase “speed to may make sense to slow down and even encourage higher- access” for critical Move from one-size-fits- increase the cost of account openings by quality customers activation components all campaign commu- reaching out to the right new prospects. nications to AI-based Evolve test-and-learn Introduce opportunity digital test and learn IDENTIFYING THE PROBLEM… framework to be more to make personal Perhaps the hardest thing about working dynamic and closer to connection Build omni-channel on improving digital quality is that there value banking check-up are so many credible drivers and oppor- Use AI to improve experiences to ensure tunities to explore. (See Figure 3.) Many Enable zero-friction efficacy of outreach customers are getting bankers face an overwhelming number fulfillment at time of the most out of their of proposals and are challenged to pri- opening banking and uncover oritize what merits investment, where to opportunities to add spend scarce test-and-learn resources, value and what just sounds good on paper. For example, to increase funding Source: Novantas analysis

6 | RACE TO QUALITY: RETHINKING DIGITAL ONBOARDING

TREASURY Given the rise of digital deposit acqui- segmentation would improve the over- SEES sition and the marked difference in all accuracy of product and business funding quality compared with branch profitability calculation by capturing IMPLICATIONS deposits, it is critical that treasury the difference in long-term stability (or groups provide an accurate behavioral expected life) of deposit balances. FROM DIGITAL analytic view of deposit quality for the Absent such a segmentation, purpose of deposit valuation and broad- Treasury runs the risk of overvaluing er balance sheet management. deposits and misjudging the liquidity ONBOARDING, Treasury must evaluate whether to and interest rate position of the bank. adjust funds transfer pricing segmenta- This situation may become more severe TOO tion frameworks to include a customer as digital acquisition becomes the norm acquisition channel dimension. Based unless progress is made to close the on insights from the Novantas Origina- quality gap. BY GREG MUENZEN tion Quality Benchmarking, a channel Director, New York [email protected]

…AND TACKLING IT temporary closures. Getting a program create personalized strategies that lead to Novantas sees two clear areas for right is no simple matter, especially better performance. improvement that most banks could given the underlying reward structures Beyond these areas, each bank will benefit from today. and channel silos that have been cre- have a different and evolving agenda. First, digital teams must coordinate ated over many years. Some banks are Given the speed of changes in this space, better with their front-line branch already experimenting to find the right we see it as critical to have continuous counterparts where excess capacity is branch model for their circumstances. monitoring of program performance rela- underutilized and the technology to dis- NAB, for example, has slashed branch tive to peers and on an absolute basis. It is tribute and manage distributed calling hours to create segmented workdays. important to understand where the bank has been battle-tested during COVID-19 This is a must-solve challenge. is making individual gains versus a rising Second, banks must increase tide lifting all boats. the personalization of critical Improving the process of digital acqui- early engagement and deepen- sition and retention have certainly been on ing outreach. Too many organi- bank to-do lists for the last couple of years. zations are using one-size-fits-all Too often, however, other pressing issues approaches to customer com- took precedence. The COVID-19 pan- munication instead of moving demic has reinforced that banks should the customer efficiently through catapult this to the top of the list. the account-opening process. Every new customer gets the Ethan Teas same cadence, ask, messaging, Managing Director, Australia creative and channel mix. The [email protected] more advanced banks are cre- ating variation based on simple Sarah Welch demographic segments and very Director, New York basic rules (e.g., avoiding mar- [email protected] keting credit cards to ineligible customers.) AI can be leveraged Brandon Larson here to create micro segments Managing Director, New York and test-and-learn exercises that [email protected]

7 | WINTER 2020 SITTING DOWN with Novantas

BY ROBIN SIDEL SITTING DOWN WITH NOVANTAS | KEN LAROE

Ken LaRoe is at it again.

After a two-year hiatus, the founder of two Florida banks is back in business with plans to build a new institution that integrates the ESG (environmental, social and gover- nance) movement into a community bank. An avowed en- vironmentalist, the Florida native envisions Climate First Bank as an institution that can fund rooftop solar projects, create a seamless customer experience and pay dividends to shareholders.

Ken sat down with Novantas (virtually) on Oct. 27 to talk about why it’s a good time to start a bank and how Climate First will, as the bank’s website says, "support customers, communities and our planet by operating as a vehicle for positive change."

Q: This first question is a pretty obvious A: We have filed all the applications one. You have already built and sold and are starting to get questions back. two banks. Now we’re in the midst of a I am tapping into We will be state chartered. We don’t pandemic, interest rates are low, the have the 30-day letter yet. We will economy is fragile and unemployment is new investors in the have our offering circular this week. high. Why in the world do you think this We have already been getting written is a good time to start a bank in the St. commitment letters. I am tapping into Petersburg/Tampa Bay region? ESG space, new investors in the ESG space, which is really exciting. As of this morning, I had A: When I started planning Climate which is really more than $10 million in commitments First, we didn’t have a pandemic. But exciting. and my goal had been $10 million by the I was fully convinced we would have a end of October. I want to try to be at $17 substantial economic meltdown because million by the end of November. I know the bubble economy couldn’t continue. I can sleep at night then. We opened First Green in 2009 at the trough of the recession and people Q: What are your goals for Climate First asked the same question. We were one does civilized, not predatory, factoring. in terms of size? of the only banks in Florida loaning I would like to pursue commercial loan money. There were deals all over the brokerage, which isn’t common in bank- A: I want to take this to the next level place because banks were running ing. If we can’t get the commercial loans, with a goal of $5 billion in assets before customers off. Trust me — it’s the perfect we can broker them and get the fees. I hang up my coat and tie. The plan time to get in the banking business. Buy I think a recession is the perfect time is to get through the de novo period, low, sell high. The low-rate environment to start. That said, I wouldn’t be jazzed do a capital raise, do an acquisition definitely impacts earnings, but I want about running an existing bank with an that puts the bank at a size that is more fee-based businesses that aren’t existing portfolio in a recession. interesting to an investment bank, go as reliant on NIM and we will provide public and start paying dividends. I good deposit products. I want to look Q: Where do things stand with Climate don’t want to follow the typical de novo at everything from an ESG perspective. First in terms of charters and other reg- model in Florida, which is you start, I’d like to have a factoring division that ulatory approvals? you build and you sell. We will have

9 | WINTER 2020 coast to Maine and across to Washington state and across the country. It was transformative. I was in the emotional space of seller’s remorse, thinking “I’m 60 years old and is this it?” I did a lot of soul searching and a lot of hik- ing to try to get my head on straight and figure out what I wanted to do. And it just came to me that I’ve got to do it again. I also have been restoring a historical family property and I am writing a book. It’s definitely not a business book. It’s fiction. It might have legs at some point.

Q: How does the mission of Climate First Bank differ from that of First Green Bank, which also had an environmental focus?

A: Climate First will be a lot deeper than First Green, which was a journey in which you don’t know what you don’t know. At Climate First, the environment is my Ken LaRoe, Climate First Bank gig. All the other stuff is important, but the tagline for Climate First is physical locations, but not many and higher. I think the regulators will really “because nothing else matters.” By not big. The teachings from COVID-19 have their thumb on us. I have experi- that, I mean social equity doesn’t mat- are that you need a drive-through, but ence with the regulators. They know me ter if you don’t have a planet. Financial I may not need an office. We will have so it is a lot better and nicer for me than inclusion doesn’t matter if the planet is one branch when we open in May 2021, it would be for someone who was doing uninhabitable. Climate First can have a couple by October and then a fourth their first bank. I have proven myself an impact on everything from rooftop and a fifth. That’s as far as we’ve gone and I work well with the regulators and I solar to renewable energy to building right now. value them. They are another set of eyes retrofits. It’s all stuff we can do, but and they know what they’re doing. So, nobody really pursues it. I want to put Q: This is your third de novo bank. What it’s a little more burdensome now, but a nice package together for building are some of the differences between that’s OK. upgrades. And you don’t have to be a starting a bank today and when you liberal Democrat to want to save mon- founded Florida Choice Bank in 1999? Q: What have you been doing since ey. It’s a non-partisan issue. At First selling First Green Bank to Seacoast Green, we did a lot of solar loans for A: It’s a lot harder. At First Green, it was Banking Corp. in 2018? commercial buildings for people who almost impossible — we got what was the absolutely didn’t care about the envi- last charter in Florida for nine years. The A: The first thing I did was take a ronment, but it saved them a lot of mon- capital requirements are more stringent cross-country trip with my wife. We took ey. The bigger we are, the more people and the de novo expectations are a lot a mini-motor home, went up the east we can touch. It’s a mission to me.

10 | SITTING DOWN WITH NOVANTAS | KEN LAROE

I’d like to change a lot of lives and reverse the damage to the planet.

Q: What was the genesis of your devotion to environmental efforts? Small banks are the A: I guess it was an epiphany that came backbone of small to me when I was 14. I grew up in a rural area of Florida hunting and fishing in Lake County, where there are more than business and small 1,000 lakes. Many of them got deeply polluted. My grandparents lived near business is the backbone one of those lakes and I would go there and fish, but as I got older you couldn’t catch any fish. Then we started catch- of the country. ing fish that had fins or tails that were necrotic and they had lesions and ulcers The giant banks are getting bigger. on their sides and I thought, “What in the heck is going on here?” Then I start- I don't think that's healthy. ed hearing about all the herbicides and pesticides in the lakes. It defies logic why everyone isn’t concerned about the environment. It’s common sense. online account opening. You still have habits. Is your primary bank a national Q: You are also seeking for Climate to have branches and the quality of bank, regional bank or a community First to be the first bank in Florida that the customer who comes through the bank? When is the last time you went to qualifies as a benefit corporation. What branch is probably higher. We never a branch? does that mean and why is it important? had decent online account opening at First Green — we had signature cards. A: I’m a dinosaur. I like paper. I still like to A: A B-corp requires certain standards I don’t want to have four branches in go to the bank and deposit checks. When that are memorialized into law. You every community. My daughter and son- I worked at a bank, I walked downstairs state a public purpose or general social in-law are millennials and they would and went to the teller. I bank with a local purpose and everything you do has to be not consider a bank unless they could community bank and a regional bank. I in the interest of the corporation — from have a seamless digital experience. And still go to the bank, but they won’t let me shareholders to suppliers. There’s never we need AI for decisioning. I can’t do in because of COVID-19 so I go to the been a Florida bank that is a B-corp. It’s a solar loan program on a large-scale drive-through. I go to the bank once a a great banner that says we’re not only basis unless I can get a much quicker week — guaranteed. talking the talk, we’re walking the walk. decisioning. We are in the process It’s built into our corporate DNA. This of vetting our core processor and we Q: You have described yourself as is very important to me because if I are spending hours going through being pretty rabid about conservation get hit by a bus, I want Climate First to product demos. and recycling. What is the strang- continue this way. est thing you do in your effort to be Q: You have participated in the industry’s environmentally conscious? Q: The pandemic has propelled the consolidation, selling your two previous banking industry’s race to develop more banks to larger banks. Does the industry A: We try not to throw anything away. digital capabilities. How important will really need another bank from you? We compost all of our food stuff. We the role of digital be for Climate First? recycle everything. We cut out the plas- A: We have fewer than 100 charters in tic windows of envelopes and recycle A: It has to be. I’m a baby boomer and I the state of Florida. Small banks are the the paper and plastic. We literally put don’t have a digital cell in my body, but backbone of small business and small one garbage can by the road every I am tired of getting beat up by millen- business is the backbone of the country. two months. nials over it. We have to have a seamless The giant banks are getting bigger. quality customer experience in the I don’t think that’s healthy. Robin Sidel customer realm. We have to have really Director, New York good mobile banking, online banking, Q: Tell me a little about your banking [email protected]

11 | WINTER 2020 THE ART OF SAYING “NO” IN RETAIL DEPOSIT RATE NEGOTIATIONS

BY ADAM STOCKTON

fter years of towing the line on rate negotiations for retail deposits, many bankers have resumed the uneconomic and inefficient practice that often delivers premium Arates to customers who aren’t loyal to the bank. The current industry environment of low rates and wide- spread cost pressures underscore the need for banks to negotiate rate sparingly with analytics that can help set guidelines for bankers and customers alike. In essence, it’s time for bankers to start saying “no.” THE ART OF SAYING “NO” IN RETAIL DEPOSIT RATE NEGOTIATIONS

CREEPING BACK AFTER A DECLINE tiated pricing, such as mortgages and employees who run an approval and Rate negotiation has long been a thorn in Canadian term deposits. audit process. the side of bankers. Following rampant use in the prior rising-rate environment THE HIGH COST OF NOT ONLY COSTLY, BUT INEFFECTIVE of 2004 to 2006, most U.S. banks adopt- NON-STANDARD PRICING AND RISKY ed stringent restrictions in an effort to These forms of non-standard pricing A Novantas analysis of six Compara- eliminate the practice. And it seemed to drive substantially higher interest tive Deposit Analytics banks with the work: negotiations were used in less than expense. Novantas has found that an highest levels of non-standard pricing 1% of non-wealth balances in 2015 based average of 16% of total savings/MMDA revealed that none showed consistency on Novantas Comparative Deposit Ana- interest expense is held in the 5% of in how much negotiated pricing they lytics (CDA) benchmarking. negotiated balances, an impact of over used at a region or a branch level. There But the pace of negotiations started 12 basis points in total portfolio depos- was no observable correlation with local to increase again in recent years as rates it costs for savings/MMDA. Chronic competitive rate dynamics, nor were rose and rate competition returned with a negotiators saw even higher cost, as top there markedly higher levels of balance vengeance. By 2019, rate negotiations had quartile banks averaging 36% of interest retention at the regions or branches jumped up to represent 5% of balances. expense in 11% of balances. The numbers with the most price negotiation. In While the 5% figure represents a are even higher in the wealth line of addition, an analysis of Novantas’ relatively small portion of overall retail business where many banks individually customer-level deposit scores shows balances, it underestimates the impact negotiate more than 50% of deposits. no benefit of increased persistence of of negotiation. For example, the 5% of Even more critical in the current negotiated deposits. In fact, many nego- portfolio balances equates to an aver- environment is that individualized tiated deposits leave the bank within six age of 25% of acquired balances in any pricing incurs labor expense that is months despite receiving a higher rate. given month across CDA participants. often hidden in other parts of the P&L. Furthermore, a Novantas analysis Negotiated pricing occurs in a Branch visits that are made solely for of CD renewals at one institution deter- number of ways, from above rate-sheet the purpose of renewing a promotion or mined that bankers should have turned exceptions for high-balance customers negotiating a higher rate on a renewing down 8-10% of customer rate requests. to allowing customers to receive a term deposit can take 30-60 minutes of The costly negotiation behavior also promotional rate for which they don’t sales time. In addition, many banks staff carries enterprise risk. Conduct risk, qualify to products that allow for nego- a “pricing desk” with multiple full-time in which certain classes of customers 5% LOOKS Of course, most negotiated deposit rates set a price that reflects the whole rela- PRETTY are in the commercial line of business. tionship. But it is very difficult to con- While retail executives may worry vince banks to run a controlled study about 5% exception-priced balances that proves or disproves this advantage. LOW and wealth managers may stress about Still, commercial lines of business 50%, the amount of exception-priced do have some tricks to share with their FROM THE interest-bearing deposits in commercial retail brethren. Over the last few years, is as high as 80+%. The practice is most banks have been making progress in COMMERCIAL prevalent among large corporates which driving data and analytics into the seem to be immune from pricing pres- hands of its relationship manager sure driven by the low-rate environment negotiators. When armed with data SIDE OF THE and challenged profitability. on a client’s on-us and off-us holdings, With so many exceptions, you might combined with analytics that estimate FENCE wonder why banks bother with standard the likely price sensitivity of different prices at all. Historically, banks have balances, it turns out RMs do a much believed that you can achieve better better job at negotiating pricing. Suc- BY PETE GILCHRIST profitability overall by maintaining a cess improves further when RM incen- EVP, New York low standard rate and relying on relative plans consider deposit quality and [email protected] tionship-management intelligence to growth metrics.

13 | WINTER 2020 RETAIL BANKING

PRICE NEGOTIATION ON DEPOSITS IS COMMON IN BOTH THE U.S. AND CANADA, BUT ARE IMPLEMENTED VERY DIFFERENTLY

U.S. CANADA

Savings/MMDA: Savings/MMDA: >5% of balances Wealth only

Term Deposits (CD/GIC): Term Deposits (CD/GIC): <1% of accounts >50% of accounts

Customer Focus: Customer Focus: Few customers, but dispro- Very common in all but the portionately high value and lowest balances, high “share of mind” for historically nearly all GICs sales force. In 2019, 50% were negotiated of wealth deposits at some banks were negotiated Key Challenges: Shift the historical para- Key Challenges: digm as some customers Separate wealth and/or the will try to negotiate no few truly high-value matter what customers without allowing “trickle down” Alter approach to make it positive: “no-hassle” Segmentation and pricing multi-channel consistent delivery of offers Manage force and customer expectations and perceptions

Source: Novantas Research

THE Negotiations about rate take on a whole banks can use the digital channel to offer ROLE OF different look when the customer is a higher rate for a larger balance or more looking at a computer screen instead profitable behaviors. This can be done of a banker across the desk. Banks are through personalized pop-ups based on NEGOTIATIONS scrambling to bolster digital capabilities the customer’s profile. amid the pandemic and the issue of rate Value Exchange — A simple chart IN DIGITAL should be part of those improvements. can show what the customer needs to do The ability to personalize offers to get a higher rate, including duration CHANNELS can play a significant role when rate is and balance size. under consideration. But just like in the “Act Now” — Limited-time specials physical environment, any offers must that are tied to incremental balances or provide benefits to both the bank and behavior can conquer inertia with an the customer. offer that feels too good to resist. As banks seek to attract, deepen “People Like You” — Guide to and retain the best customers, they will appropriate offers by referring to actions need to develop, test and adopt new taken by similar customers. Expand digital capabilities in order to maximize the opportunities with a button at the value for customers and the franchise. bottom that tempts the customer with Potential examples include: “other products and offers that may be “Supersize it” — Just as McDonald’s interesting to you.” encouraged customers to order a larger Good, Better, Best — Provide assorted 14 | order of fries for a small increase in price, options that can be easily compared. THE ART OF SAYING “NO” IN RETAIL DEPOSIT RATE NEGOTIATIONS receive better treatment through front- First, exceptions must be reduced or progress faster than branch staff who line negotiation, was such a concern eliminated. That may create uncomfort- effectively work against the bank by in the U.K. that regulators banned all able conversations for bankers who are offering customers a higher rate than rate negotiation. Another worry is that accustomed to acquiescing to customer are available online — and earn sales the sales force will alter behavior to demands. The good news for bankers is incentives in the process. maximize their incentive compensation, that customers have fewer alternatives Finally, staff must be retrained or further driving up negotiation cost. when rates are low across the industry, so realigned. Bankers have been condi- Ultimately, banks that allow negotia- the time for the tough conversations is now. tioned to behave in a certain way and tion are introducing negative attention from regulators and watchdogs in return for a behavior that is more costly than beneficial.

THE TIME TO ACT This long, low-rate environment will allow banks to unwind negotiated pricing that was put into place over the last two years and try new practices that go beyond the ineffective reforms of the last low-rate environment. Furthermore, branch network consider- ations and shifting customer preferences raise the stakes for near-term changes. As customer preferences rapidly shift towards digital banking during the COVID-19 pandemic, banks must adapt now for a future that is digital-led instead of branch-led. Person-to-person negotiations aren’t effective, leaving banks to figure out how to provide offers through dig- Second, banks should develop clear banks need to help them understand ital channels. This leaves banks with a and stress-tested policies around excep- how to behave differently — and why. It choice: either build a new digital-led tions. Many banks found that the flood- is human nature to avoid difficult con- negotiation process (see sidebar) or gates opened once exceptions started versations, so bankers must be armed begin to shift the paradigm to some- up again as rates rose. Banks must be with the right data about customer thing more sustainable. realistic about which segments will be elasticity and profitability. In addition, many banks are under- considered for exceptions in the future Understanding true value-added taking another round of deep cuts to the and then ensure the criteria will work sales and focusing the networks on the branch network and reducing staffing and be followed through the cycle. future of these activities are critical levels. There is little time for low-value Third, analytics is critical. Centrally to driving profitability value through activities in a thinner sales and service identifying rate-sensitive customers will in-person channels. The retail banker model. Sales figures that are simply a be critical to success moving forward. who discusses rate with the customer renegotiation of rate may artificially prop Driving results through the front line will play a critical role in that equation up already-flagging branch statistics. has been ineffective, but there must be during this unusual period. a replacement that works both in branch STRATEGIES TO AVOID RATE TALKS and digital channels. Adam Stockton Many banks should go back to the draw- Fourth, build consistent multi-chan- Director, New York ing board to overhaul their rate strategies. nel delivery. Nothing will stop forward [email protected]

15 | WINTER 2020 he definition of primacy in commercial banking is evolving for many clients during the pandemic, but too many banks are either unaware of the change or don’t know how to tap into it. TA primary relationship that is based on the payments business and the operating account instead of the traditional connection to lending can help pump up fee income at a time when margins are squeezed and clients are seeking new providers. Banks can deepen relationships and drive new revenue opportunities by taking a fresh approach to identifying the characteristics of primacy for commercial clients. A NEW FOCUS ON THE VALUE OF PRIMACY Primacy is defined as the state of being first, whether in terms of importance, order or rank. After all, what commercial relationship manager doesn’t want to be first in importance or ranked first by the PRIMACY client? Intuitively, being a corporate’s primary bank feels right and would IN COMMERCIAL BANKING seem to be an appropriate goal. Achieving primacy for commercial clients is a comprehensive goal. Not only must the bank meet the company’s BY MIKE RICE AND PETER SERENE most important needs, but its bankers must be considered as trusted advisers who have an emotional connection and devotion to the company. In historic terms, this was defined as the bank that would “lend through the cycle.” Beyond those emotional relationships, Novantas has identified a slew of benefits that are associated with being a corporate’s primary bank. These include larger share of wallet, higher retention levels and better credit quality. (See Figure 1.) There is also a pricing advantage: primary customers are less price sensitive and primary banks typically get the “last bite at the apple” in competitive situations. Overall, the primary bank possesses an information advantage that can be leveraged to drive these outcomes and create higher levels of insights, engagement and satisfaction.

A NEW FOCUS ON PRIMACY IN COMMERCIAL BANKING

GUIDING THE CLIENT FIGURE 1: VALUE OF PRIMACY RELATIONSHIPS There are compelling reasons to incent the client to move from non-primary MM/LC LIFT SME LIFT FROM to primary. FROM WINNING First, meaningful customer acqui- PERFORMANCE METRIC WINNING PRIMARY PRIMARY sition in the current pandemic envi- RELATIONSHIP ronment is very difficult. Banks appear RELATIONSHIP to be doing a good job of deepening Average relationships by cross-selling to existing Deposit 14x 11.6x customers. This becomes more difficult, Balances however, in a world where banks are Financials Average engaging remotely with clients. Loan 7.1x 11.4x Second, there is a defensive play to Balances combat the increased levels of switching. Greenwich Associates recently reported Average that switching has increased to 16% from Number of 1.8x 6.3x the historic levels of 10-11%. Novantas Product Accounts believes the pandemic has exposed Holdings Average customer service challenges, which has Number of 1.5x 2.8x only been exacerbated by the industry’s TM Services often-poor response to and execution of the Paycheck Protection Program. Note: SME = Small/Medium Enterprises, MM = Middle Market, LC = Large Corporate Finally, commercial lines of busi- Source: SME | Novantas Case Study — includes businesses with 0-20mm in annual sales ness are facing a profitability crisis. revenue; MM/LC: NDepth database

FIGURE 2: CREDIT LEVERAGE RATIO (AVERAGE BANK VS. TOP PERFORMER) In a world where interest rates are likely to stay low for several years, NIM will Illustrative of a Regional Bank with $175M in be severely impacted. As a result, banks Annual Treasury Management Gross PxV will turn their attention to driving fee income growth in treasury management, 1.50% capital markets and other areas. The size of the prize is significant; Novan- 1.35% tas estimates the typical regional bank can see an increase of 25% in treasury 1.20% management fees by focusing on pri- 1.05% $37.5M macy and changing its orientation to Opportunity treasury management services and the 0.90% core operating account. (See Figure 2.) 0.75% Furthermore, treasury management ser- 0.75% vices are essential for the client and 0.60% drive above-average profitability (based 0.60% on modest capital allocations).

0.45% PRIMACY CHALLENGES Although the concept of primacy isn’t Credit Leverage Ratio (%) 0.30% new, there is a renewed interest by banks to make meaningful progress in 0.15% this area. Challenges abound, however, and if left unaddressed, it will be almost 0.00% impossible to rally the troops and mea- Average Bank CLR Top Performer CLR sure the opportunity. From a corporate’s perspective, Note: CLR is defined as Annual Gross TM PXV/C&I loans; benchmark includes 14 banks the designation of a primary bank is Source: Novantas analysis changing from lending-centric to primary

17 | WINTER 2020 COMMERCIAL BANKING

FIGURE 3: STATED DEFINITION OF CORE/PRIMARY

Less than $100MM $100MM–$500MM More than $500MM

46% Holds primary operating / payment account(s) 42% 53% 35% Holds most important TM products / services 48% 44% 33% Holds largest loan(s) and/or line(s) of credit 38% 38% 32% Length of relationship with the bank 42% 41% 31% Depth of the relationship with dedicated banker at bank 35% 31% 22% Amount of fees company pays to bank 28% 26% 2% None of the above 1% 0%

Source: Novantas Research | 2018 Commercial Banking (U.S.) Base: Total respondents (Less than $100MM: n=219, $100MM to less than $500MM: n=168, Over $500MM: n=201) Question: “A bank is considered a core / primary bank…”

operating account/payments-centric. (See still have embedded credit-centric table stakes to winning new and Figure 3.) There are multiple drivers for models (even when they've added retaining existing relationships, but this shift. a veneer of relationship focus) and many banks are falling short. Novantas First, the extension of credit has haven’t grasped the importance of the research indicates that more than half become commoditized and plentiful. As payments/operating account model. of companies indicate that it is “very a result, banks can’t charge a premium Indeed, most banks don’t even have important” that their core/primary bank on the credit side. Even more significant a purposeful program to achieve pri- provide business advice. In all, 87% said is the burst of innovation that is improv- macy or understand how to get there. it was “very important” or somewhat ing efficiency in the payments industry. They lack a standard definition of important.” So why don’t many regional As companies come under pressure to primacy, both qualitatively and quan- banks have the infrastructure or pro- cut costs, advancements like integrated titatively, and have difficulty defining cesses to consistently deliver actionable payables/receivables and real-time pay- it by business line. They often don’t advice to their clients? ments can make a bank stand out from measure or embed primacy into the crowd. employee goals and incentive plans. MEETING THE CHALLENGE This pivot can give the largest trea- Furthermore, Novantas has found Deepening primacy within a commer- sury management banks an advantage that relationship managers routinely cial business requires a clarion call to due to their more advanced brand/mar- over-estimate how many and which action. It also requires investments in keting, operating leverage, technology customers are primary because it isn’t data and analytics, disciplined program investments and decision support/ana- well-defined by the institution. management and alignment of orga- lytics. Many regional banks, meanwhile, Finally, advice-based selling is nizational structures and incentives to

18 | A NEW FOCUS ON PRIMACY IN COMMERCIAL BANKING enable, drive and measure change. bank-at-work programs and other relat- program management discipline and In fact, banks must first meet the ed products to form a comprehensive cultural transformation. A primacy challenge of deepening primacy by view of the current relationship. External initiative can and should be self-funding defining it. A successful primacy defi- benchmarking data can then overlaid to from the outset. With the right data nition must be simple, measurable and determine fair share. and analytics, banks can and should aligned to financial metrics. Primacy To capitalize on this fact base, banks identify ample near-term opportunities brings myriad benefits, but ultimately, it should provide RMs with both structured to redefine and deepen primacy within should be clearly reflected in higher fee action plans and analytical insights to the existing book. revenue, growth in primary operating prioritize activities that deepen relation- Still, realizing the full potential of deposits and increased cross-selling ships. Segmenting clients based on rela- the initiative will take time. It's no small across the organization. tionship characteristics and switching feat to work deeper into opportunities While definitions and measure- propensities will enable RMs to focus within the back books and enhance ments require some calibration across their activities on the clients who are go-to-market practices that are used lines of business, banks should resist most likely to reward calling efforts with over extended commercial sales cycles. the temptation to make these overly incremental core business. Moreover, Sustaining this behavior requires track- complex. The notion of being a “first call banks still need to compete on the value ing, but also requires aligning incentives trusted advisor” and leveraging a broad of their advice, products and service, within RM / TMO scorecards. range of capabilities to meet the full rather than on price. Integrating custom- The ultimate measure of success spectrum of a client’s financial needs er scoring is a valuable tool in driving is when deepening primacy evolves should sit at the core of any definition. pricing discipline through the process. from an initiative to a way of life within Once primacy is defined, data and The effectiveness of the RM will the organization. analytics become critical enablers. remain the greatest determinant of suc- Banks must establish a robust fact base cess. But by putting the right data and Mike Rice around the levels of primacy within their analytics in the hands of RMs, it is possi- Managing Director, Chicago back book as well as in their new-to-bank ble to dramatically elevate performance. [email protected] relationships. This requires aggregating loan, deposit, treasury management and ULTIMATE GOAL Peter Serene capital markets data. Stronger programs Redefining and deepening primacy is a Principal, Chicago will also integrate data from wealth, journey and it requires both sustained [email protected]

19 | WINTER 2020 OLDER AMERICANS Warm Up to Branchless Banking

The pandemic has pushed older Americans toward digital banking, but there is still an enormous opportunity to move more of these consumers to the online channel. New research from Novantas finds that consumers who are 55 and older and are shopping for checking accounts are increasingly willing to consider a bank without branches. Those who have opened an account online favor desktops and laptops over mobile devices for the process and are typically satisfied with the process despite some challenges.

Only 16% of shoppers aged 55 and older have opened an account through digital channels. Most of them began the process on a laptop or desktop.

Digital Account Opening and Completion

I have tried to open a checking account online, but was 72% unable to complete the process Desktop / Laptop 3% I have never opened a 81% 16% 7% checking account Tablet online

I have successfully 11% opened a checking account online Smartphone

Source: Novantas Customer Knowledge | FABB DAO Survey, September 2020 Sample: FABB shoppers age 55+ (N=591), shoppers who opened digitally (N=111)

20 | At the same time, it is clear that these shoppers are warming up to branchless banks.

“A bank without branches feels less legitimate” “It is important for a bank to have a well-designed app”

May Jun Jul Aug Sep

48% 75% 42% 70% Somewhat/ 42% Somewhat/ 65% Strongly Agree 41% Strongly Agree 69% 32% 62%

33% 20% 37% 21% Neither agree 40% Neither agree 20% nor disagree 36% nor disagree 21% 47% 28%

19% 5% 21% 9% Somewhat/ 19% Somewhat/ 14% Stongly Disagree 24% Stongly Disagree 10% 21% 11%

Source: Novantas Customer Knowledge | FABB DAO Survey, September 2020 Sample: FABB shoppers age 55+ (N=591)

Of those shoppers who opened an account online, more than two-thirds had a good experience.

67% Other Accounts Opened Since Checking Somewhat/Very Positive 28% Traditional savings account 40% 39% Digital Account Another checking account 14% Opening Experience

Credit card 15%

3% 29% Certiﬁcate of deposit (CD) 6% 1% Other, please specify 22% Very positive Somewhat negative Somewhat positive Very negative Neither positive nor negative

Source: Novantas Customer Knowledge | FABB DAO Survey, September 2020 Sample: FABB shoppers age 55+ who opened digitally (N=111)

21 | WINTER 2020 THE NEW MATH OF DISTRIBUTION PLANNING

BY ANDREW HOVET

he race to consolidate branches FIGURE 1: U.S. BRANCH COUNT has taken on additional urgency during the pandemic due to earnings pressure and shifts in 105,000 customer behavior toward digital banking. The role of the branch 100,000 inT new-to-bank acquisition has been 95,000 underappreciated, however, and efforts to recoup lost sales through marketing 90,000 investments are complicated by the effi- 85,000 ciency and effectiveness of incremental 80,000 marketing spend. At the same time, the industry is 75,000 being rattled by a group of new competitors who are appeal to customers in 200320042005200620072008200920102011201220132014201520162017201820192020 fresh ways. There is no simple formula to drive Source: Novantas BranchScape new customers to the bank when there are fewer branches in their line of vision. Instead, banks must tackle the challenge by assessing the roles of density, aware- The pace of change has varied across tered branches at a much faster pace. ness, digital targeting and distinctiveness. markets due to differences in customer The initial pace was slow in Australia, attitudes, competitive structures, retail but it has recently accelerated. That THE CASE FOR CONSOLIDATION banking economics and lessons learned may serve as a harbinger for Canada, Changes in customer behavior have led from the financial crisis. The U.S. branch which has been slow to reduce branch to bank branch consolidations across the count has drifted downward at a steady count, but shares many of Australia’s globe over the last decade. (See Figure 1.) rate of 2% per year, but the U.K. has shut- market characteristics.

22 | THE NEW MATH OF DISTRIBUTION PLANNING

FIGURE 2: CHANNEL SEGMENTATION TRENDS

2014 2015 2017 2020

54% 45% 39%37% 31% 29% 27% 17% 15%16% 12%13% 10%11% 9% 8% 7% 6% 7% 8%

Thin-branch Ready Channel Mixer Branch Traditionalist Innovation Seeker Internet Ready

Branch Dependence and Attachment

Note: 2020 N=1,008, 2017 N=4,351, 2015 N=4,346, 2014 N=4,125 Source: Novantas Research | U.S. Multi-Channel Survey

The reductions in branch count have replacing branch operating expenses for the U.S. found that most customers want a been consistent with the changes in other these investments, allowing them branch within 15 minutes of their location customer behavior. Customer channel to close underperforming locations with regardless of how often they actually go segmentation research from Novantas limited lost sales. to the branch. (See Figure 3.) The case shows a plurality of consumers are now As density becomes less important, for additional consolidation, therefore, is part of the “thin-branch ready” segment. visibility takes on additional value to upon us. (See Figure 2.) These are customers who drive awareness. Banks need to ensure want access to branches, but don’t require that their expensive physical invest- THE INEVITABLE COMPLICATION a high level of branch density because ments create higher levels of awareness Over the last few years, banks have they visit branches infrequently. Even as for prospects and not just physical generally plucked most of the low-hang- a growing number of consumers embrace convenience for existing customers. ing fruit. Branches with low sales, low all-digital neobanks, the number of “dig- Using anonymized mobile geo-analytic transactions and/or low (or negative) ital ready” consumers who don’t require data to evaluate the “billboard value” profitability have largely been closed. branch access is still a surprisingly small of bank branches, Novantas has found Along the way, the impact of customer segment of the population. that banks can achieve as much as a attrition and reduced new-to-bank cus- Historically, physical proximity 20% improvement to awareness through tomer acquisition have been manageable. created awareness. Novantas believes better branch placement. Now, however, there is a divergence in the the current changes in customer reli- Historically, network planning focused consolidation and reinvestment profile of ance on the branch has decreased that on providing multiple points of access market participants. (See Figure 4.) importance in driving new-to-bank through overlapping branch trade areas. On one hand, banks with higher customer acquisition while increasing As customer dependence on branches density and branch visibility are con- the role of marketing, distinctiveness diminishes, banks only need a branch solidating effectively and minimizing and digital targeting. In recent years, within a reasonable distance from the the impact on new-to-bank customer some banks have been successful in customer. Recent Novantas research in acquisition and attrition. Customers

23 | WINTER 2020 RETAIL BANKING

FIGURE 3: WILLINGNESS TO TRAVEL TO BANK BRANCH – BY CHANNEL SEGMENT

Thin-branch Ready Channel Mixer Branch Traditionalist Innovation Seeker Internet Ready

73% 65% 67%65% 52%

23% 18% 18%20% 13% 13% 14% 9% 11%12% 11% 4% 4% 2% 2% 2% 2% 1% 0% 0%

Less than 5 minutes 5–15 minutes 16–30 minutes More than 30 minutes I don't need a branch

Q27 How far are you willing to travel to a bank branch? Source: Novantas | 2020 U.S. Branch Centricity (N=1008)* unweighted

FIGURE 4: IMPLICATIONS OF CONSOLIDATION/REINVESTMENT PROGRAMS

Dense – Optimized 100% Dense – Random 90% Thin – Optimized 80% Thin – Random

70%

60% High visibility, dense markets can con- 50% tinue to be harvested efficiently (e.g., 40% reduction leads to 8-16% 40% sales loss) 30% Percent Remaining Sales Moderate to thin scale market performance will continue to erode with 20% closures (e.g., 40% reduction leads to 16-27% sales loss) 10% Reinvestment into highly effective 0% marketing and digital required to 0% 20% 40% 60% 80% 100% sustain growth

Percent Branch Closure

Source: Novantas research

24 | THE NEW MATH OF DISTRIBUTION PLANNING

As density becomes less important, visibility takes on additional value to drive awareness.

increasingly appear to have a zone branches to reduce operating expenses, markets. In some cases, they may need of indifference with regard to branch but that will further diminish their to sacrifice thin markets where they lack density and don’t value the “excess con- awareness level and reduce customer sufficient awareness, distinctiveness venience” provided by banks with the acquisition. Or they can retain the and density required to win. largest branch share in a market. branch networks and grapple with a net- Thin-scale regionals will be quite On the other hand, banks that have work that is expensive and inefficient. challenged to re-deploy network oper- less density and branch visibility are Neither is a good solution. ating expenses as customer behaviors more impacted by “lost” new-to-bank shift. These banks already face chal- sales and attrition when they consolidate A PATH FORWARD lenges with awareness, which may make branches. For many of these banks, it As we survey the market, we see that digital targeting more difficult. The best seems that the branches are the primary banks fall into a few different archetypes way forward would be to target a specific means for driving awareness and consid- — from large-scale players across all segment that may allow them to com- eration. When the branch is closed, the markets to banks that primarily compete effectively despite their thin scale. sales funnel collapses quickly. pete as a thin-market player. Depending Customer behaviors are changing At that same time consolidations are upon the bank’s situation, there are a rapidly and branch scale is becoming having a disparate impact, the effective- number of strategies that can be pur- less important in driving growth. ness of marketing reinvestment is also sued as branch closures continue. Assessing capabilities across network diverging. Banks with stronger levels of National players can thin their planning, marketing and digital will be awareness (often correlated with branch networks across most dense markets critical to ensuring survival. share) can increase marketing spend and still experience a limited impact These critical capabilities include while maintaining effective marginal on new-to-bank customer acquisition. the use of customer-level data in net- costs per acquisition (CPA). But banks These banks already have high levels work planning to better understand the with weaker levels of awareness are less of awareness and consideration regard- impact of physical network decisions able to effectively invest in marketing less of branch scale. Reinvestments in on new-to-bank customer acquisition as because the marginal cost of acquiring marketing and digital targeting may be well as retention of existing customers. the customer is more than the value of expensive on a CPA basis, but they will Banks that accelerate branch closures the customer who has been acquired. be more efficient than the cost of operat- without a clear plan for driving custom- These two forces of density and ing too many ineffective branches. er growth do so at their peril. marketing effectiveness are squeezing Sub-scale national and super-re- banks in markets where they have gional banks need to pick their spots, Andrew Hovet moderate to thin branch presence. So pulling expenses out of dense markets Director, New York what are their options? They can close to reinvest in growth across thinner [email protected]

25 | WINTER 2020 PANDEMIC PUSHES BANKS to Improve Operations

Banks are continuing to adjust their operations amid growing evi- dence that it will still be months before life returns to a pre-pandemic state. Improvements to digital access are naturally a key area of focus, but banks are also taking other measures to ease customer access to products and services.

Novantas is tracking these improvements with regular surveys that gather information and provide insights into how financial institutions are responding to the pressures that COVID-19 uncertainty has placed on their branch networks. The following results reflect September responses from 32 financial institutions that range in size from fewer than 100 branches to more than 2,000.

Half of the surveyed banks say that improving the quality of digital sales is a high-priority issue.

Low Priority High 6 5 4 3 2 1

100% 7% 13% 6% 90% 17% 22% 16% 10% 23% 30% 80% 13% 70% 14% 16% 13% 10% 16% 60% 27% 14% 19% 17% 23% 50% 20% 40% 28% 13% 23% 19% 20% 30% 19% % of Responses 20% 29% 13% 21% 20% 16% 20% 10% 10% 3% 0% Improving Increasing Getting to a "new Enhancing remote Reducing Accelerating quality of digital new-to-bank normal" on branch servicing distribution costs transaction sales customer acquisition operations migration

Novantas SalesScape Comparative Analytics Survey, fielded September 2020 Question: What is the highest priority distribution challenge by end of 2020? Please rank with 1 being highest.

Low Priority High 26 | 6 5 4 3 2 1 Other initiatives include improving coordination across channels, better digital account opening and enhanced targeting.

Not considered at this time Under consideration Underway

100% 4% 4% 90% 12% 12% 12% 19% 27% 25% 80% 20% 70% 27% 60% 53% 50% 46% 40% 77% 30% 69% 68% 61% % of Responses 20% 29% 35% 10% 0% Ensuring Increasing Improving upstream Identifying high Deploying smarter Using offers and quality at time of coordination targeting to enhance potential customers marketing incentives to drive opening via digital between channels funnel quality and differentiating automation (e.g., customer behavior opening (e.g., using branch experience (e.g., AI-based outbound improvements staff for outbound using higher cost messaging for on-boarding calling) channels) on-boarding)

Novantas SalesScape Comparative Analytics Survey, fielded September 2020 Question: As you think about improving quality of digital sales, what initiatives are underway or under consideration at your FI? Not considered at this time Under consideration Underway

Most respondents also are upgrading their mobile applications…

81% 63% 15% Implementing Changing Changing upgrades to your digital account digital banking The ultimate goal: mobile origination platform Improve customer experience application platform provider and access to funds.

…and supplementing the call center with 90% work-from-home resources. 80%

80% 70% 70% 60% 60% 50% 81% 50% 40% 40% 30% 52% 71% % of Responses 30% 20% 33% 38% 29% 52% 10% % of Responses 20% 43% 43% 29% 0% 10% Increased Increased Increased Reduced or Increased 0% mobile deposit deposit ATM eliminated deposit capture availability withdrawal foreign ATM availability Implementing Implementing Routing Implementing Enabling (mRDC) limits on mRDC limits fees on ATM work-from-home live chat contact chatbot video deposits deposits agent pool center calls connections to branch with agents staff

Novantas SalesScape Comparative Analytics Survey, fielded September 2020 Question: Are you planning any changes to your digital infrastructure in the upcoming year? (Check all that apply.) Novantas SalesScape Comparative Analytics Survey, fielded September 2020 Question: Are you planning any permanent changes to your contact center Question: What types of policy changes have you adopted to make it easier infrastructure in the upcoming year? (Check all that apply.) for customers to conduct business remotely? (Check all that apply.)

27 | WINTER 2020 TAKING TIME TO FOCUS ON THE RELATIONSHIPS YOU CARE ABOUT

BY HANK ISRAEL his is a rare time in which banks AN UNUSUAL OPPORTUNITY can zero in on their portfolios of When rates are high, banks have little deposit and loan customers by time to research, plan and execute those analyzing persistence, rate sensi- plans to drive balance growth for depos- tivity and shopping behavior. its and loans. Rapid, broad offers overtake TAnd unlike previous low-rate environ- tailored customer experiences around ments, banks can now tap into advanced preferences as banks try to keep up with scoring capabilities to help build a stable competitors on rate. The result: organi- customer portfolio and cement those zations look past the longer-term dele- relationships for the long term. terious effects of low-quality customers

28 | TAKING TIME TO FOCUS ON THE RELATIONSHIPS YOU CARE ABOUT

FIGURE 1: SAVINGS/MMDA ACQUISITION & PORTFOLIO RATES

Portfolio Acquisition

1.60% 1.51%

1.40%

1.20%

1.00%

0.80% 0.90%

0.60%

0.40%

0.20% 0.14% Quarterly Weekly CDA data CDA data 0.14% 0.00% Q1’19 Q2’19 Q3’19 Q4’19 2/1/20 2/8/20 3/7/20 4/4/20 5/2/20 5/9/20 6/6/20 7/4/20 8/1/20 8/8/20 9/5/20 2/15/20 2/22/20 2/29/20 3/14/20 3/21/20 3/28/20 4/11/20 4/18/20 4/25/20 5/16/20 5/23/20 5/30/20 6/13/20 6/20/20 6/27/20 7/11/20 7/18/20 7/25/20 8/15/20 8/22/20 8/29/20 9/12/20 9/19/20

Source: Novantas Comparative Deposit Analytics (CDA) Database, September ‘20 | Simple average used to protect participant anonymity

who are more than happy to take the CURRENT TRENDS CALL FOR growing more comfortable with opening offer and run. ANOTHER LOOK online accounts are increasingly attract- When rates are low, banks tend to Banks have plenty of opportunity to ed to neobanks and fintech providers ignore deposits altogether. re-visit these customer relationships. that take aim at maintenance fees, over- Instead, leading deposit and loan The Federal Reserve has pumped an draft and ATM fees. (See Figure 2.) product managers should use today's extra $2.3 trillion into the economy so low-rate environment to spend the time far this year, most of it coming in the THE DEPOSIT AGENDA curating portfolios and then taking the form of commercial deposits that have Banks can take steps now to redefine time to engage with customers. Loan flooded bank coffers. Since the begin- multiple types of deposit relationships. managers can trim credit lines of high- ning of February, the spread between The ultimate goal: determine which er-risk customers and cancel lines entire- acquisition and portfolio deposit rates customers are valuable enough to keep ly for credit-card customers who haven’t has shrunk form an average of 85 basis and find ways to lengthen the duration activated or used their cards in years. On points to zero. Acquisition rates, mean- of their low-cost deposits. the deposit side, rates will play a smaller while, have fallen from 1.6% to 0.14% for For relationship-oriented cus- role so that organizations can take the network banks. Even direct banks have tomers, banks can offer fair rates time to develop customer experiences dropped rates to the 40-60 bp range, and reinforce convenience, customer that redefine the relationship. (See Fig- possibly the lowest level they have ever engagement (relevant interactions in ure 1.) They can also identify balances set this early in a low-rate cycle. support of longer-term relationships), that, regardless of customer relationship, Banks are also facing challenges for service and recognition of their value. have a low probability of retention. revenue growth. Consumers who are Engaged customers, for example, are

29 | WINTER 2020 DEPOSITS

FIGURE 2: INDUSTRY ANNUALIZED REVENUE (TRAILING Q4)

Net Interest Income Non-interest Income Non-interest %

$900 B 45% $800 B 40% $700 B 35% $600 B 30% $500 B 25% $400 B 20% $300 B 15% $200 B 10% $100 B 5% $0 B 0%

’16 ’18 2 Q2'03Q4'03Q2'0Q4'04 Q2’054 Q4’05Q2’0Q4’066 Q2’07Q4’07Q2’08Q4’08Q2’09Q4’09Q2’1Q4’100 Q2’11Q4’11Q2’12Q4’12Q2’13Q4’13Q2’14Q4’14Q2’1Q4’15 Q25 Q4’16Q2’17Q4’17Q Q4’1Q2’198 Q4’1Q2’209

Source: Novantas analysis of FDIC call reports

FIGURE 3: PORTFOLIO FOCUS historically less price-sensitive than other customer types. For those who have just one product with the bank and tend to seek rate, OBJECTIVE CUSTOMER TREATMENT banks can take the time to engage the customer in a more comprehensive relationship by offering products and Lower rates on the portfolio. Identify Downprice services that can result in less price short persistence/price-sensitive bal- Balances with sensitivity and fewer withdrawals. ances that may require outreach for Confidence Banks also need to identify the retention customers who are likely to flee as soon as a better offer comes around. If a bank needs deposits, it could be worth paying a little more to retain them now rather Target short persistence, price-sen- than paying a lot more to re-acquire Build Deposit sitive balances with treatments to them in the future. Resilience engage them in other value proposi- Furthermore, banks can develop tions at the bank a deposit acquisition playbook that considers the different levels and pools for different deposit amounts. Limited deposits can be acquired through Focus new-to-bank offers on custom- direct offers, avoiding repricing the ers whose marketing attributes cor- Acquire High- entire book. Moderate deposits can be relate to long persistence and low Quality Balances acquired with time-limited offers that price sensitivity. This may reduce focus on term and/or behavioral-based production, but increase longevity. deposit products. Banks can offer a higher deposit rate if the customer demonstrates active checking account or credit-card behavior. Another option Source: Novantas analysis is to offer a lower loan rate if a customer

30 | TAKING TIME TO FOCUS ON THE RELATIONSHIPS YOU CARE ABOUT meets certain deposit criteria. And large message around balance retention. The sums of deposits can be acquired out of knowledge that marketing and incen- footprint with direct offers. tive costs for acquiring $1 in deposits can be as high as 40 basis points will THE ENABLING CAPABILITIES also drive treatment strategy. Similarly, As in the high-rate environment, banks the mCOF scores rank customers on can use scores to target customer the cost of acquisition. Novantas has treatments specifically around deposit found that focusing on the acquisition actions. Like credit scores, these deposit of lower-cost balances can save as scores provide organizations with much as fivefold in the marginal cost of insights of customer behavior in three deposit acquisition. dimensions. (See Figure 3.) In an evaluation of portfolio reten- First, shopping behavior helps tion for five banks, it is clear that the determine how likely the customer is to different strategies result in far different bring money to the bank, often regard- outcomes. While one bank enjoyed 95% less of rate. Rate sensitivity assesses balance retention for more than 70% of how much money a customer will bring the balances it acquired, another only in per unit rate. Finally, measuring enjoyed 60% of balances with retention persistence will help a bank prepare of 90%. for how long a customer’s deposits will Banks shouldn’t get lazy about remain at the bank. deposits just because rates are low. Taken together, scores can predict There’s little doubt that banks can the marginal cost of funds (mCOF) for achieve their balance-retention goals by acquired balances. Individually, they can different customer-level strategies. The inform which treatment is appropriate first step is determining that this is the for each customer. (See Figure 4.) time to get started. For example, persistence score bands rank balance retention. Focusing reten- Hank Israel tion efforts in the lower score bands is Director, New York more efficient than a general marketing [email protected]

FIGURE 4: PRIORITIZING BALANCE RETENTION

DEPOSIT RETENTION % BALANCES % 12-MONTH RETENTION SCORE RANGE >850 9% 105+%

800-849 6% 100-105%

750-799 12% 97-100%

700-749 35% 93-97%

650-699 21% 85-93%

600-649 9% 70-85%

550-599 6% 55-70%

<550 1% 35-70%

Source: Novantas analysis

31 | WINTER 2020 SEPTEMBER The Department of Justice charged 57 people with fraud tied to the Paycheck YOU MAY HAVE MISSED Protection Program. Those charged are accused of trying to steal $175 million from A snapshot of relevant developments the program that was aimed at helping small businesses during the pandemic. in recent months

Square launched a feature that allows Financial-services app Acorns launched a companies that use the payments provider job portal powered by Zip Recruiter that for payroll to give employees up to $200 of lets customers search for and apply for their paycheck ahead of time. jobs within the app.

Azlo, which provides banking and business Amazon joined a growing number of services for small businesses, introduced other big companies that will allow a service to help entrepreneurs automate certain employees work remotely until tasks related to budgeting and invoicing. next summer. BBVA provides Azlo’s banking services. NOVANTAS NEWS PayPal began allowing customers to buy, The FDIC announced Novantas is one OCTOBER sell and hold cryptocurrencies in their of 14 technology companies selected to CNBC reported that European digital accounts. The payments company also compete in the next phase of its effort bank Revolut is close to applying for a said customers will be able to use cryp- to develop a new approach to financial U.S. banking license. The London-based tocurrencies for payments on its network reporting for the nation’s banks. The FDIC company plans to apply for a charter with starting next year. has said that a new system will better equip the Federal Reserve Bank of San Francisco regulators to detect signs of risk and take and California’s Division of Financial Insti- The average American has fewer credit early action to protect consumers, banks, tutions, CNBC said. cards and a smaller credit-card balance in the financial system and the economy. 2020 than in 2019, according to Experian’s Varo launched a small-dollar loan prod- annual State of Credit report. Novantas notched the #84 position on the uct that gives customers up to $100 for 2020 IDC FinTech Rankings, marking a $5 fee. The loan must be repaid within NOVEMBER the 10th consecutive year that company 30 days. Nebraska residents voted to cap interest has appeared on the list. The 17th annual rates from payday lenders at 36%, down vendor ranking represents the leading Nearly two-thirds of business owners from levels as high as 400%. hardware, software and service providers and business leaders surveyed by Prin- to the financial services industry from cipal Financial Group anticipate it will San Francisco-based Affirm, a provider of around the world. take a year for their companies to fully online installment loans, filed an IPO with recover from the pandemic. In the mean- the SEC. The company plans to public on time, they are focused on increasing Nasdaq under the symbol AFRM. their revenues and customers, improving customer satisfaction and offering new Google said 11 banks and credit unions, products or services. More than half of including Citi, Green Dot and BMO, will the respondents said their employees offer its Plex online checking account when seem stressed due to additional family it is launched next year. The account will be or caregiving responsibilities. integrated into the Google Pay app.

32 | AT THE PODIUM WITH NOVANTAS

Although in-person events aren’t on many calendars right now, Novantas experts have been busy hosting and participating in virtual events. Please reach out to the session leaders or Novantas Review Editor Robin Sidel ([email protected]) if you missed any of these online events and would like to know more about the content that was presented.

Executive Vice President Brandon Lar- Measures to Tackle Cybersecurity Risks “COVID-19 Economic Outlook in Bank- son and Director Sarah Welch presented in Treasury Operation” at the annual ing: Rates and Long-Term Expectations.” a Consumer Bankers Association webi- conference of the National Association nar on Nov. 17 titled “Building Qual- of Corporate Treasurers. Novantas experts participated in the ity and Quantity of Customers in Dig- Consumer Bankers Association’s annu- ital Channels.” The session explored Pete Gilchrist, executive vice president, al CBA Live virtual conference. Man- how to build customer relationships in and Greg Muenzen, director, delivered aging Director Brandon Larson and Di- a digital environment and identified a presentation about deposit trends rector Sarah Welch hosted a session on programs that can help banks drive during the pandemic at the 2020 Sept. 29 called “Examining COVID-19 higher quality. NeuGroup Bank Treasurers’ Peer Group Effect on Digital Banking and Custom- on Oct. 6. The members-only network er Experience” and joined Chris Kay Director Andrew Hovet and Brian Wal- includes treasurers and senior treasury and Mary Kate Loftus from M&T for a lace of Reflexis hosted a joint webinar and finance personnel from banks in “Debriefing on COVID-19 and Digital.” on Oct. 22 that explored the challenges the U.S. and Canada. facing branch banking and strategies to Also that day at CBA Live, Executive improve returns from the branch network. Brad Resnick, principal, joined experts Vice President Andrew Frisbie and Di- from S&P Global Market Intelligence rector Hank Israel hosted a conference Jeff Diorio, director, participated in and the University of Chicago in a session called “How to Find the Best De- an Oct. 6 webinar called “Proactive S&P-sponsored webinar on Oct. 1 called posit Customers When Rates Are Low.”

33 | WINTER 2020 Novantas Review is published quarterly by Novantas, Inc., 485 Lexington Avenue, New York, NY 10017. © 2020 Novantas, Inc. All rights reserved. “Novantas Review” and “Novantas” are trademarks of Novantas, Inc. No reproduction is permitted in whole or part without written permission from Novantas, Inc.